Although these two costing methods are similar in many ways, they differ in the way they calculate costs:
- First-In, First-Out (FIFO) costing method. Inventory Control assumes that the first units to arrive at a location are the first units to be shipped. Consequently, the units on hand in the closing inventory are assumed to be from the most recent purchases. As a result, current revenues are matched to oldest costs.
- Last-In, First-Out (LIFO) costing method. Inventory Control assumes that the last units to arrive at a location are the first ones to be shipped. Consequently, the units on hand in the closing inventory are assumed to be from the oldest purchases. As a result, current revenues are matched to oldest costs
Inventory Buckets
Inventory Control keeps track of the order in which units arrive at a location by storing their receipt date, receipt number, quantity, and extended cost in individual "buckets." The program calculates the cost of units shipped from the costs stored in the buckets.
- For FIFO, units from the bucket having the oldest receipt date are shipped first.
- For LIFO, units from the bucket having the most recent receipt date are shipped first.
There is no limit to the number of buckets Inventory Control can use.
The inventory balance is calculated the same way for both FIFO and LIFO, by summing the costs from all buckets.
The I/C Item Status report includes the information contained in each bucket, including the offset bucket.
Offset Buckets
For each item at each location, there is an "offset" bucket used for special cases, such as when you ship more items than there are in stock from a location. (You can ship more items than are in stock only if Inventory Control is set up to allow negative inventory levels.)
Inventory Control uses all buckets, including the offset bucket, to calculate the inventory balance for an item at a location.
Offset buckets contain a quantity and a cost, but do not contain a date or receipt number, like other buckets.
An offset bucket can contain a positive quantity, instead of a negative quantity, and other buckets may exist while the offset bucket has either a positive or a negative quantity.
If you ship more units of an item than the total quantity from all buckets, Inventory Controls records a negative quantity in the offset bucket, and uses the most recent cost for the item at the location to calculate the extended cost.
If you ship units when the offset bucket has a positive quantity, the units in the offset bucket are shipped before the units in other buckets.
If you ship units when the offset bucket has a negative quantity and there are units in other buckets, the offset bucket is cleared by shipping the number of units you specify plus enough units to cover the negative quantity in the offset bucket. In the calculation, Inventory Control includes any cost in the offset bucket (positive or negative), so the offset bucket has zero quantity and zero cost after shipping.
Receipts do not affect the offset bucket.